Algorand will disrupt DeFi (Decentralized Finance)

In my last article for the Algorand community, I explained why a borderless economy is so important, not only for the unbanked but also for people living in countries with fiscally irresponsible policies such as mine; Argentina. In it, I described the monetary madness that I had to live in my last 30 years.

Since I published that article only two months ago, a new chapter in Argentina’s economic history has already unfolded.

Two weeks ago, the Argentine Peso devalued by 25% in just one day (from AR$ 45 to 60 AR$/USD). Think about it, this means a tremendous loss of purchasing power for Argentinian citizens savings and salaries. And as I pointed out in my first publication, it is precisely for that reason that we need to encourage a borderless economy.

Since that day, bank deposits denominated in US$ started to fall in huge amounts because people ran to withdraw their savings for fear that they may be taken away or converted to Argentinian pesos as has happened before.

This means that today there are thousands of US dollars resting in Argentinian houses or as we say here “under the mattresses”, with all the risks that that situation brings.

As an economist, and an enthusiast in cryptocurrencies, I started to receive lots of questions from people eager to know if they could obtain some rent with financial instruments they could find in the crypto space.

The DEFI (Decentralized Finance) environment is only in its first steps and solutions are somewhat very limited. Most of them (at least that I know of) are developed on Layer 2 of Blockchain. This usually makes them not user friendly and difficult to explain to “outsiders”. The UX (User Experience) also becomes far from optimal. And the thing that bothers me the most is that being deployed on a different layer as their parent BlockChain they tend to lose the security and/or decentralization that gives Blockchains the reason to be.

In order to truly obtain a borderless economy, DEFI solutions need to be developed with the same inner properties of their parent platform because if they don’t, they would always be challenged by centralized solutions who could give a more friendly onboarding.

This week Silvio Micali, Turing award winner and founder of Algorand, published a new blog post where he informed that Algorand Inc is proposing two revolutionary solutions to be deployed on Layer 1 level of their platform.

The generation of new fungible tokens and

The execution of atomic multi-party transfers (AMPTs),

These features are fundamental to the development of DEFI applications like the tokenization of assets such as derivatives, options, swaps and securities. One example of this is the Dutch auctions that Algorand generated for their initial token distribution. Those auctions could be performed on chain and on a global scale thanks to this new approach.

The innovation of these solutions being built at Layer One level of Algorand’s Blockchain is truly revolutionary. This means that they become part of the consensus protocol maintaining the original blockchain characteristics which, in addition, are unique to Algorand’s Pure Proof of Stake approach (Security, Scalability, Decentralization, Finality and Speed).

This not only ensures those features but also helps building solutions more user friendly as well as improves the user experience. Think of all the complicated Smart Contracts and Layer 2 solutions built today. How are users that are not familiar with the blockchain environment ever going to feel comfortable leaving their savings there if we already have doubts about their true security and efficiency?

Finance usually involves multiple parts. Networking is critical to bring liquidity, price arbitrage and lower interest rates. In order for DeFi to become a real global reality you need speed and scalability. These features cannot be obtained with Proof of Work. Only Algorand’s Blockchain can provide them without losing security and/or centralization.

This is why I’m convinced that Algorand is on the path to becoming the leading platform for DeFi solutions. Developers in this environment (including current players such as MakerDAO, Compound, Dharma and others) should develop on top of its platform and gain first mover advantages.

Trust me, citizens of countries with unreliable currencies and financial institutions will immediately use these financial solutions once they become secure and easy to use, generating a huge flow of fresh new capital.

Let’s hope another chapter of monetary madness does not happen again soon but If you ask me, I wouldn’t bet too much on it. In the meantime, let’s give people opportunities to have access to the advantages the financial world can provide.